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Who Can Insure Companies Against Political Risk?

Energetska budućnost Hrvatske 2025. Okrugli stol 1: Gordana Gelenčer, Jasmina Horvat Martinović, Dražen Jakšić, Ivan Paić, Leo Prelec i Vladislav Veselica
Energetska budućnost Hrvatske 2025. Okrugli stol 1: Gordana Gelenčer, Jasmina Horvat Martinović, Dražen Jakšić, Ivan Paić, Leo Prelec i Vladislav Veselica / Image by: foto Ratko Mavar

The security of networks and product pipeline infrastructure is critical for any business, as these “highways” for energy and fossil fuels enable any further business, from production, resale, to sales to end users. Energy companies therefore depend on infrastructure, and sabotage does not require much knowledge. This was heard at the round table “Geopolitical Winds and Energy at the Crossroads” at Lider’s conference on the Energy Future of Croatia.

– Our electricity system is very fragile and highly vulnerable, as threats are no longer just technical. It is enough for someone with basic education to choose five pillars and take some action against them, and you have a blackout that will spread beyond Croatia. The risks are very high if we do not react. This is not a cyber attack, but a classic physical attack that can easily have consequences – said Končar board member Ivan Paić.

A similar situation with fossil fuel pipelines was pointed out by Janaf board member Vladislav Veselica. Namely, Veselica explained, the southern branch of the Druzhba oil pipeline from Russia to Hungary passes through Ukraine and is equally susceptible to damage from physical attacks.

– This is such a risk, the pipelines are laid shallow in the ground and regardless of the charters that Ukraine must respect, this pipeline is at risk. Janaf has therefore increased its capacities towards Hungary by three million tons, as it imports raw materials for its two refineries from the Russian Federation. Regardless of living in a digital age, management, middle management, and the human factor are key, as people make strategic decisions. Those who do not recognize the signs on the path will not be able to survive in the long run – emphasized Veselica.

The director of the Energy Institute Hrvoje Požar, Dražen Jakšić, explained that blackouts, such as the one that recently hit Spain and Portugal, cannot be ruled out due to a number of unpredictable circumstances. However, the state of the electricity network is such that it needs to be renewed.

– We also had a blackout last year in Dalmatia, which spread from Albania and Montenegro. Such situations are always possible, we are well connected with our neighbors, which is a consequence of development in the former state, so disturbances in neighboring countries can spread to us. The state of the network is such that half of it is over 50 years old, its lifespan has expired, and it needs to be renewed, by itself and without increased demand, especially with the need for new connections – said Jakšić.

Virtual Congestions

Leo Prelec, director at ENNA group, stated that timely construction of a key part of critical infrastructure – the LNG terminal – has been favorable for the business of this company, as it has enabled supply security.

– The system starts from customers and demand, and everything else is ensuring the security of energy supply to customers. We should not underestimate the Croatian electricity and gas network, we have a very stable system. We now have a story about virtual congestions, and in practice, the system is underloaded – said Prelec.

The CEO of Marsh McLennan Croatia Jasminka Martinović explained that insurers do not deal with geopolitical risk, but that with the help of technologies they can well predict critical points in supply chains.

– With predictions and scenario development, technologies give us greater opportunities to reduce risks and potential damage. Our companies increasingly recognize this, although it is known that we are not leaders in non-life insurance. For example, one to three percent is approximately the insurance cost on a project, while the cost of downtime is always significantly higher, it can go up to 50 percent. Insurance is also a visible cost, it smooths out the investment over time, you know what to expect and what you are insured against – Jasminka Horvat Martinović.

Veselica, considering the energy source that is at the core of JANAF’s business, warned that the risks for JANAF, given the current situation, are much greater than in other segments of the energy sector.

– We do not have the right to make a bad decision, Janaf is people, 500 families, and dividends need to be paid to the owner. Who can insure us against political risk? We are the most exposed in terms of geopolitical risk – said Veselica.

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